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NIIT Ltd.: Profit wise a muted performance - Views on News from Equitymaster

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NIIT Ltd.: Profit wise a muted performance

Jul 23, 2011

NIIT Limited has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 15.5% YoY and 1.0% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 15.5% year-on-year (YoY) during first quarter of financial year 2011-2012 (1QFY12). This came on the back of strong volume growth across all its business segments.
  • Operating margin declined by 0.8% YoY during the quarter, largely due to higher development, production & executions expenses (as a % of net sales).
  • Net profits grew by 1.0% YoY. This was on account of lower margins at operating levels.
  • Added 277 employees during the quarter taking the total headcount to 4,434.

Consolidated financial snapshot
(Rs m) 1QFY11 1QFY12 Change FY10 FY11 Change
Sales 2,780 3,212 15.5% 11,993 12,483 4.1%
Expenditure 2,493 2,904 16.5% 10,425 10,889 4.5%
Operating profit (EBITDA) 287 307 7.1% 1,568 1,593 1.6%
Operating profit margin (%) 10.3% 9.6%   13.1% 12.8%  
Other income/(expense) (74) (64)   (329) (181)  
Depreciation 203 227 11.8% 751 854 13.7%
Profit before tax 10 16 63.0% 488 558 14.4%
Tax (15) (13)   108 89 -17.6%
Profit after tax/(loss) 25 29 17.2% 380 469 23.5%
Share of associates' net profit 105 102 -2.9% 322 453 40.7%
Net profit after tax/(loss) 130 131 1.0% 702 922 31.4%
Net profit margin (%) 4.7% 4.1%   5.9% 7.4%  
No. of shares (m)   165.1   165.1 165.1  
Diluted earnings per share (Rs)*   5.6     5.6  
P/E ratio (x)*   10.0     10.0  
*On a trailing 12-months basis

What has driven performance in 1QFY12?
  • NIIT recorded a 15.5% YoY growth in net sales during the quarter. The 'corporate learning solutions (CLS)' business (51% of net sales) and the 'individual learning solutions (ILS)' business (37% of net sales) witnessed a growth of 18.4% YoY and 15.6% YoY respectively during the quarter. The 'school learning solutions (SLS)' business (12% of net sales) witnessed a growth of 4.9% YoY during the quarter.

  • NIIT's ILS business witnessed a healthy growth of 15.5% YoY on the back of a 16% YoY growth in Career IT enrolments. Banking enrolments also witnessed a strong traction during the quarter. Overall enrolments were up by 11% during the quarter. Operating margins for this segment declined to 9.6% during the quarter as compared to 11.3% seen during the same period last year. This was due to expenses towards the development of the Cloud Campus product.

  • The SLS segment witnessed a growth of 4.9% YoY during the quarter. This was on account of a growth of 24% YoY in the business from non-government schools. However, once again the segment saw margin erosion with margins declining to 12.2% as compared to 16.7% seen during the same period last year.

  • The company has added 173 non-Government schools during the quarter. The pending order book stood at Rs 4,975 m at the end of the quarter out of which 30% is executable within the next 12 months. The management reiterated that they would be concentrating on the private school business. The company, however, still continues to derive nearly 59% of the segment's revenues from the government schools during the quarter.

    Segment wise performance
    (Rs m) 1QFY11 1QFY12 Change
    Individual learning business (IT)
    Net Revenue 1,019 1,178 15.6%
    Operating profit 115 113 -1.7%
    Operating profit margin 11.3% 9.6%  
    School learning solutions
    Net Revenue 384 403 4.9%
    Operating profit 64 49 -23.4%
    Operating profit margin 16.7% 12.2%  
    Corporate learning solutions
    Net Revenue 1,377 1,630 18.4%
    Operating profit 109 145 33.0%
    Operating profit margin 7.9% 8.9%  

  • The CLS segment witnessed an 18.4% YoY growth in sales during the quarter. This was due to the 21% growth in volumes for the business. This in turn was driven by the growth in 'Managed Training Services' as well as online learning products. The margins expanded by 1.0% YoY during the quarter. Going forward, the management expects the volume growth to continue in this segment. Pending order book stood at US$ 87.0 m, with around 61% executable in the next 12 months.

  • The operating margins declined by 0.8% on a YoY basis during the quarter. The decline was mainly due to the increase in business development expenses (largely due to Cloud Campus product).

  • On account of lower operating margins, the growth in sales did not flow down to the bottom line. The net profits grew marginally by 1.0% YoY during the quarter. The margin at net level was down at 4.1% as compared to 4.7% seen during the previous quarter (4QFY11).
What to expect?
At the current price of Rs 56, the stock is trading at a multiple of 8.8 times our estimated FY14 earnings. As per the management, the quarter saw a strong demand environment. Going forward, they expect good growth in all of its segments.

GThe company has already implemented Cloud Campus on its 50 centers. This product is witnessing good enrolments. The company has signed a large deal of US $ 110 m for its managed training services which will contribute US $ 6.2 m per quarter going forward.

The management expects to repay Rs 700 m of debt during the current financial year. The timing of the repayment would depend on the collection of the receivables from the government.

The management stated that the margins from ILS business would be under pressure for the next quarter too due to product development expenses towards Cloud Campus. After that, margins are expected to improve from ILS business. Overall for the full year, the management stated that the margins for the business would remain at the same level as that of last year. At the same time, they expect margins from the SLS and CLS businesses to improve.

We maintain our 'Buy' view for the company from a 2-3 year perspective.

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